Oil operations in the times of Coronavirus

by | Apr 29, 2020 | Articles | 0 comments

With the sanitary measures imposed in much of the world to prevent the spread of the virus, many countries have reduced their oil imports, an exceptional juncture that has also generated a significant negative impact on the global economy.

As we know, China is the main importer of oil in the world, hence the suspension of its main commercial operations related to this activity strongly affected the price of a barrel of oil on the world’s stock exchanges, reaching its lowest value in the last 20 years.

Certainly, the overproduction of crude oil, added to an insufficient market demand and the scarce storage space, meant a hard blow to the oil activity, undoubtedly one of the main economic engines of our Peruvian jungle, which allows us to make a brief analysis.

In the department of Loreto there are six oil companies with valid hydrocarbon exploration and exploitation license contracts, but currently, are the oil companies operating, what are they doing to maintain their operations, have they closed operations and in what way?

To answer these questions, we would like to point out that despite the fact that the oil activity is within the group of companies exempted to continue operating according to Emergency Decree N° 046-2020-PCM, some of them, in order to limit any possibility of contagion and spread of the disease, decided to reduce the number of personnel to the minimum and to confine the crude oil.

Along the same lines, the administrative personnel have been performing their functions via teleworking. On the other hand, and following all the safety protocols for workers, the Iquitos jungle refinery is also working with essential personnel to continue refining oil, in order not to jeopardize the supply of oil, fuels, gas and/or any derivative until the economic reactivation of the country.

The biggest problem currently faced by oil companies is the price of crude oil, in Peru the minimum price per barrel to continue operating must fluctuate at US$ 39.00 dollars¹ per barrel of production (including payment of royalties, canon and taxes), in such a way that with the current price per barrel (as a consequence of COVID-19) of less than US$ 19.00 dollars, it is commercially unviable to continue producing because it does not cover the value of the cost, which would imply the closure of the various operations in the future.

In that order of ideas, we must specify that according to the 2019 annual royalty table published by Peru Petro, for hydrocarbon production for the Loreto region was S/. 146’000,027.00, then it is worth asking ourselves what was done with that money, why was it not used in public works, is it fair that Loreto is the third region with the highest number of COVID-19 deaths, is it fair that Loreto is the third region with the highest number of COVID-19 deaths?

Is it fair the lack of beds for coronavirus patients in the two hospitals in Iquitos and even worse that in the interior of the region people die without dignity? Is it fair that corpses of Peruvian citizens are accumulated in a room that serves as a mortuary, when it is a region that has money from the oil canon but that public works projects for the region are never made viable?

On the other hand, the plan to close the gaps for the population of the oil area of the Loreto region, contemplates investing S/ 5,292’000,000.00 from 2020 to 2025, of which S/ 3,231’000,000.00 would be directed to infrastructure works, another S/ 1,184’000,000.00 to human capital, S/ 595’000,000,000.00 to connectivity works and S/ 595’000,000. 00 to works² of connectivity and territorial integration, S/ 162’000,000,000.00 to economic development, S/ 75’000,000.00 to promote sustainable environment and S/ 45’000,000.00 million to institutional strengthening, works that benefit the population of 25 districts belonging to the provinces of Datem del Marañón, Loreto, Alto Amazonas, Requena and Maynas.

Currently, several oil operations in the Peruvian jungle have opted to invoke the force majeure clause, proceeding to temporarily suspend operations in the lots in order to avoid putting the health of their collaborators at risk due to COVID-19 infection and, of course, the latent risk of spreading to the inhabitants of the native communities near the oil lots, who, by the way, have opted for “self-isolation”, blocking the gates at the entrance to the communities because they are vulnerable populations.

To avoid this, experts in the hydrocarbon sector propose the following:

1.- The postponement of the payment of oil royalties until the price of crude oil recovers worldwide.
2.- Encourage the issuance of the New Royalties Regulation.
3.- To make the compliance clauses more flexible and reschedule them.
To promote the modification of the Organic Law of Hydrocarbons, which unfortunately with this temporary Congress will not be feasible.
5.- To homologate the oil and gas canon.
To redistribute the oil canon, being the canon the vehicle to reach the regions, with the purpose of carrying out public works.
7.- To continue with the plan to close the gaps to avoid social conflicts.
8.- Avoid closing the lots, which would cause massive layoffs, and in case the lots are returned to Peru Petro, the latter would have to assume the costs of monitoring.
License contracts that are about to expire, direct negotiation should be made more flexible.

Online conference: Profile of the Hydrocarbons Sector after Covid-19. Peru Energy 16.04.20.
2 www.elperuano>noticia-cierre-brechas, 09.02.20.